Health Care Reform Means Changes for Brokers, Not Elimination

There’s a big difference between bending and breaking; between change and destruction. This is especially important to keep in mind when talking about the impact health care reform will have on insurance brokers. Some commentators, like John Goodman, president of the National Center for Policy Analysis, are quite emphatic in their doom and gloom. In an interview published in HIU magazine, Dr. Goodman states “Under any sort of exchange that’s being envisioned by Congress or the White House, there will be no broker.”

I disagree. As I wrote several months ago, my take is that “brokers will continue to be a part of whatever new health care system emerges.” My confidence rests partly on the herculean efforts made by the National Association of Health Underwriters and other broker organizations to include specific language in several of the bills moving through Congress that explicitly permit brokers to sell products offered in an exchange. But more importantly, I believe that even after the exchanges are up and running (probably in 2013) individuals and small business owners will still need the services of independent brokers.

Whether this need for brokers will survive health care reform will be determined to a large degree by two factors: the nature of the exchange(s) created; and the viability of the individual market. While it’s (unfortunately) easy to imagine an exchange that eliminates the need for brokers, the exchanges most like to emerge from the debate in Congress are widely expected to be much more benign. In my previous post I articulated a “Theory of Disintermediation.” This theory hold that “whether the Internet will eliminate distribution intermediaries depends on the interplay of six factors of the product or service being sold, specifically how:

  1. complex the product or service is to consumers
  2. frequently the product or service is purchased
  3. personal and critical the product or service is to consumers
  4. expensive is the product or service
  5. much on-site service is required to install or use the product or service
  6. easily a description of the product or service can be digitized.”

Exchanges are likely to simplify health insurance policies and bring some standardization to marketing material and the like. However, consumers are still going to have to make a decision concerning an expensive, complex product they infrequently purchase which is critical to their health and financial security. For small business owners the need for independent expertise will be even greater: they are making a decision that effects not only their own families, but those of their workers. That’s a responsibility most employers will feel reluctant to make without expert support.

Whether individual coverage remains viable is still uncertain. The danger is that while Congress will require carriers to sell coverage to all applicants, they won’t require all Americans to purchase coverage. The result is the equivalent of allowing motorists to buy auto insurance after they’ve had an accident. Few consumers would voluntarily buy such coverage until they need it. The result would be price increases previously only experienced in states like New York where this dynamic has resulted in a costly health insurance surcharge.

This may be naive and wishful thinking, but I do think there’s enough common sense in Congress to recognize the need to require all residents to obtain coverage before they show up at the doctors office or hospital. The American people seem to recognize this. A recent ABC/Washington Post public opinion poll shows a majority of those surveyed support requiring everyone to buy health insurance. Indeed, if subsidies are offered to low-income households, support for an individual mandate rises to 71 percent. So the political wind is there to help Congress create a fair and workable approach to this issue. And that, in turn, would go a long way to keeping the individual market viable.

So if brokers are likely to be part of the new world of health insurance does that mean it will be business as usual for us?

No.

The value brokers bring to the products we sell is likely to evolve. So will the way we’re paid. For example, helping consumers find the plans that best fit their unique needs will remain at the forefront of what we do. The reforms will make that part of the job easier. The reforms will make after sale service a bit more complicated as a new layer or two of bureaucracy gets added to the mix. (Only someone working in Washington DC will claim that adding a government agency, like an exchange, to the mix will reduce problems or make resolving them easier).

These are mere tweaks in the average broker’s day. The biggest, most fundamental change brokers will face is how they are compensated. First, brokers will likely be paid less per sale. Requiring everyone to purchase coverage is a two-edged sword. It dramatically increases the number of consumers buying health insurance. It also creates tremendous pressure to keep premiums low. Distribution costs are generally the second largest budget line for carriers trailing only claims costs. With everyone having to buy, reducing broker compensation for each sale is all but inevitable. This doesn’t mean producers won’t be able to do well under the new system. They’ll just have to do more. Given that 30 percent or more of the individual cases they work on today are rejected by carriers, reforms which assure all applicants are accepted will go a long way to offsetting this per sale reduction.

The second impact of reform is likely to be the end of the commission system. At the risk of being flamed by brokers reading this blog, paying us a percentage of premiums makes little sense now and will make even less sense going forward. The reality is that the cost and rewards associated with making a sale don’t relate to the premiums paid by the consumer. The biggest driver of health insurance premiums is the underlying cost of medical care and these cost increase far faster than general inflation. It’s not uncommon for medical trend increase at twice the rate of rent, supplies, phones, and other costs associated with running an agency. Linking broker pay increases to medical trend is a historical, but no longer logical, practice.

No one likes to talk about how they’re paid and the public policy issues involved. When’s the last time you heard a doctor publicly criticize the fee-for-service model – you know, the one that rewards them for maximizing the number of tests and treatments a patient receives without regard for the outcomes of those treatments? But to think that policymakers and carriers aren’t aware of this disconnect between how broker compensation is calculated and their actual costs.

Yet broker cannot work for free – nor should they. In the current system, carriers charge consumers for the brokers compensation and pass this revenue through to to the broker. It’s an efficient method and is likely to continue, but instead of commissions, brokers are likely to receive a flat fee per month per member. There may be regular adjustments made to the level of this fee to account for inflation, but it will be independent of the underlying premium.

Additionally, we’re likely to see the emergence of consultants in the individual and small group market segments. Instead of being paid through the carrier, these entrepreneurs will charge consumers directly. This is a less efficient method –- and is currently illegal in many states. But laws can be changed and the context for a new approach to producer compensation will be strong. We shouldn’t be surprised if new systems emerge.

And many consumers may find this pay for services system appealing. When California ran a health plan in the 1990s it imposed on a five percent of premium surcharge on small business owners wanting to work with a broker. Over 65 percent of the employers enrolling in the state plan paid the surcharge.

I believe Dr. Goodman’s warning that health care reform will do away with brokers is overstated.  And brokers need to remember, just because someone – even someone as bright and respected as Dr. Goodman – claims the sky is falling, doesn’t mean it is falling. It could just be changing.